Question

Intro

WH Smith Company is evaluating three projects: A, B, C, with cash flows as given in the table. Each project requires an initial investment of $96,000 and has a required return of 6%.

Year	A	B	C
1	50,000	0	20,000
2	40,000	50,000	40,000
3	20,000	50,000	40,000
4	10,000	40,000	40,000

   Attempt 3/10 for 8 pts.

Part 1

What is the payback period for project A (in years)?

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   Attempt 1/10 for 10 pts.

Part 2

What is the payback period for project B (in years)?

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   Attempt 1/10 for 10 pts.

Part 3

What is the payback period for project C (in years)?

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   Attempt 1/5 for 10 pts.

Part 4

Which project is best based on the payback rule?

Project A

Project C

Project B

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   Attempt 1/10 for 10 pts.

Part 5

What is the NPV of project A?

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   Attempt 1/10 for 10 pts.

Part 6

What is the NPV of project B?

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   Attempt 1/10 for 10 pts.

Part 7

What is the NPV of project C?

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   Attempt 1/5 for 10 pts.

Part 8

Which project is best based on the NPV rule?

Project C

Project B

Project A

Can you answer all questions?

Answer 1

Based on the given data, pls find below steps, workings and the answers:

Part 1

What is the payback period for project A (in years)? Answer 2.30 Years

Part 2

What is the payback period for project B (in years)? Answer 2.92 Years

Part 3

What is the payback period for project C (in years)? Answer 2.90 Years

Part 4

Which project is best based on the payback rule? Answer : Based on the Payback rule, the Proejct with shorter Payback period is considered as best and in this case, Proejct A has the lower Payback period and is considered best, based on Payback rule;

Part 5

What is the NPV of project A? Answer : NPV = $ 11482.99

Part 6

What is the NPV of project B? Answer : NPV = $ 22164.53

Part 7

What is the NPV of project C? Answer : NPV = $ 23736.30

Part 8

Which project is best based on the NPV rule? Answer : Based on the Net Present Value, the Project with higher value of NPV is considered as the best Project; In this case, Project C has the highest NPV and hence Project C is considered as best Project, based on NPV criteria

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;

Computation of Pay Back Period: Here, the period is computed for each project, based on cumulative cash flows: If the cumulative value is less than or equal to zero, the period is considered as 12 months (it means that the net cumulative cash flow has not yet paid back the initial investment); Once the value turns positive in a particular year, the period for such year is observed at a proportion of actual discounted cash flow to the cumulative CF; This gives the period less than 12 months in such year; Once this is computed, total of all the years is taken and divided by 12, to arrive at the Payback period in no.of years.